- Equity returns will start to fall, but for the time being remain positive
- Portfolio reductions in equity weights likely to continue for the next two years
Peter Elston, chief investment officer, Seneca Investment Managers, says:
“The global economy has been strengthening, and we’re getting further into the current business cycle that begun in 2009. This cycle has already been longer than average, though to a great extent this is a function of the severity of the contraction that preceded it – the worse the ‘accident’, the longer the recovery.
“We, therefore, feel that it’s now time to start thinking about the next global economic contraction, which we anticipate will occur in or around 2020. This prediction is based on an extrapolation of current employment and inflation trends, as well as taking account other factors such as structural slack in labour markets. If our timing is correct, the chances of which may be slim, the current cycle will have lasted 11 years, much longer than typical.
“As for asset allocation, we’re at the point in the cycle when equity returns should start to fall, albeit remain positive, and so we would anticipate the reductions in equity weights across the range of portfolios Seneca manages, that we have implemented in recent months, to continue for the next two years.
“It’s hard to say how severe the next downturn will be. Some argue that it will be mild, because this time monetary authorities have the tools to prevent economic weakness causing stress in financial markets. Others argue that it will be more severe, because debt levels are now higher and central banks will have less scope to lower interest rates or expand already bloated balance sheets.
“Frankly, we do not know which is more likely, but are fairly confident that the next economic downturn, however severe, will see declines in equity markets. Through a sensible asset allocation framework we can reduce market risk and will strive to protect investors.”
Past performance should not be seen as an indication of future performance. The value of investments and any income may fluctuate and investors may not get back the full amount invested.
The views expressed are those of the fund manager at the time of writing and are subject to change without notice. They are not necessarily the views of Seneca and do not constitute investment advice. Whilst Seneca has used all reasonable efforts to ensure the accuracy of the information contained in this communication, we cannot guarantee the reliability, completeness or accuracy of the content.
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